Lehman Brothers, Fraud and the New York Fed

A new report
about the colossal fall of Lehman Brothers has commentators lashing the bank's
executives as well as former New York Fed chief Tim Geithner. According to the
report, Lehman used an accounting
ploy called "Repo 105" to keep $50 billion of troubled assets off its
books. The bank may have been insolvent two weeks before its bankruptcy
filing--the biggest in U.S.
history and an event that helped trigger the financial
collapse. The report says Lehman's top executives and the bank's
accountants at Ernst & Young were all aware of the questionable
accounting techniques. Many are now asking why the New York Fed failed to protect
investors, and are urging a wider investigation.

This Calls for a Wider Investigation, writes Tyler Durden
at Zero Hedge: "There should be an immediate investigation into how
many other banks are currently taking advantage of this artificial
scheme to manipulate and misrepresent their cap ratio, and just why the
New York Fed can claim it had no idea of this very critical component
of the Shadow Economy."

It's Time to Wake Up, writes Matthew Yglesias
at Think Progress: "There’s a theory out there about why the free
market ought to produce sound accounting and ratings agencies, but the
empirical evidence says otherwise. And it’s ultimately going to be
important to address these issues. It’s more polite to talk about an
impersonal crisis, but it’s clear that on both the micro scale (getting
individuals to take out mortgages) and the macro scale (distorting the
real quantities of leverage banks were carrying) that a lot of fraud
and deception was in the room when this all went down."

I am not convinced accounting played as big a role in this crisis as past ones. Here's why:

Yes,
Lehman does seem to have hid some of its loans. And that means other
banks were probably using this trick as well. But how much did the
trick distort Lehman's books. Not much. In fact, even if Lehman had
made all of its loans available for everyone to see it's not clear that
any investors would have cared, or the NY Fed would have spent one more
minute thinking about the firm's solvency... What the moves did do was
to shield the firm from criticism from the likes of short-sellers like
David Einhorn who claimed the situation at Lehman was getting worse,
but couldn't prove it.

Geithner Must Resign, insists Yves Smith
at Naked Capitalism: "Lehman was allowed by the Fed’s inaction to
remain in business, when the Fed should have insisted on a
wind-down...The Fed, which by its charter is tasked to promote the
safety and soundness of the banking system, instead, via its collusion
with Lehman management, operated to protect particular actors to the
detriment of the public at large... The NY Fed, and likely Geithner
himself, undermined, perhaps even violated, laws designed to protect
investors and markets. It is time for Geithner to go. He is not fit to
serve as Treasury secretary."

This article is from the archive of our partner The Wire.

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